No MAT on FPIs!

After many months of nail-biting suspense…the Justice AP Shah Committee Report has finally been made public. For those of you joining us late…a committee of Justice (Retired) A P Shah, Dr. Girish Ahuja and Dr. Ashok Lahiri was set up to review direct tax matters. But the immediate item on their agenda was to offer a view on whether MAT (Minimum Alternate Tax) can be levied on FIIs/FPIs.

The controversy arises from a 2012 AAR Ruling in the Castleton case. In the last year the Tax Department issued several notices to FPIs claiming they ought to pay MAT.

Thereafter the Committee was constituted and its report first received on 24th July, 2015. The CBDT sought some clarifications and hence the Finance Minister, revenue Secretary and Committee members met again, after which a revised or final report was submitted on 25th August, 2015. This report was made public today and is available on this website. It finds that MAT should not be applied to FIIs/FPIs.

Here are 3 comments in the report that I found most material and interesting…they reveal how the Tax Department has manufactured an unnecessary controversy! The titles are mine…the excerpts are from the Committee Report.

NO MAT ON FOREIGN COMPANIES WITH NO PLACE OF BUSINESS IN INDIAIn order to interpret an existing provision of a fiscal statute, the legislative history, circulars and directions issued by the CBDT can be used as legitimate aids in the construction of such a provision. Having examined the various circulars and directions issued by the CBDT, including Circular Nos. 495, 762, and 794; and the legislative history, including the Finance Acts of 1987, 2002, and 2012, it can be concluded that the Legislature could only have intended for MAT to apply to companies governed by the regulatory requirement of the Companies Act, 1956.

19 YEARS OF NO MATIn the 19 years since MAT was introduced (in 1996), it had never been levied on FIIs/FPIs, which were instead governed by the beneficial tax scheme under Section 115AD. Significantly, the Department also accepted the Timken ruling and did not file an appeal. Even after the 2012 ruling in Castleton, the Registrar of Companies, under the Companies Act, never called upon FIIs/FPIs to file their global accounts, evidencing that FIIs/FPIs were not intended to be taxed under the MAT provision.

INDIA IS AN OUTLIERNone of the other BRICS countries, namely Brazil, Russia, China and South Africa, levy MAT. Some of the OECD countries, such as Austria, Belgium, Hungary, Republic of Korea, Luxembourg, Slovak Republic/Slovakia and USA, levy MAT, but do not levy the same on foreign companies / persons unless they have a physical presence in such countries. India is therefore perceived as an exception in terms of its tax treatment of FIIs/FPIs.

Tax experts have mostly welcomed this Committee Report and the Government’s acceptance of it. Though many hoped that the same MAT treatment (non-levy) will also be extended to foreign companies with no place of business/Permanent Establishment in India. But that now will be decided by the Supreme Court when it hears the Castleton case.

Here are some comments from tax experts…

Suresh Swamy, Partner, PwC India"This is a very positive action taken by the Government of accepting the recommendations of A P Shah committee and clarifying that MAT will not be levied for period prior to 1 April 2015. The Government has opted to amend the Income Tax Act rather than merely issuing a circular. With this clarification the whole issue of levy of MAT will be resolved in favour of the tax payer. FIIs who had approached the High Court may now consider withdrawing their writ petitions filed earlier. This development will definitely cheer the investor community and will help promote India as a favourable investment destination."

Anish Thacker, Tax partner, EY India“The Govt’s assertion to clarify that MAT will not apply to FIIs for periods prior to 1 April, 2015, is a welcome step. It is understood that clarity has been given on the basis of the AP Shah panel’s recommendation and suitable amendment will be made to the Income Tax Act. This should put the fear that FIIs had on levy of MAT retrospectively to rest. The fine print will be needed to see whether foreign companies which are not FIIs could also be left out from the scope of MAT.”

Manoj Purohit, Partner, Walker Chandiok & Co LLP“With the clarification on MAT by issuing instruction to field officer to not to pursue further proceedings the dust would be settled to some extent. However, the only legitimate way to end the uncertainty about applicability of MAT on FPIs is by amendment in the Income-tax Act, 1961 or by way of a Supreme Court Verdict. An internal instruction or a circular is binding on the Income-tax department however it can still be challenged in the court of law.

The sentiment of the foreign investor investing in India through FPI regime would be positive. The decision of not initiating further actions on the notices issued to FIIs would indicate that the Government of India is willing to end the uncertainty on issues pertaining to taxation on applicability of MAT and is an step towards creating a tax friendly regime. This coupled with the decision of CBDT not pursuing transfer pricing cases like Vodafone would surely help in reviving the investor confidence and boost foreign investment.”